LinkedIn and the Government Contracts community have been abuzz about the latest Executive Order (E.O.) on diversity, equity, and inclusion (DEI), E.O. 14398, Addressing DEI Discrimination by Federal Contractors, signed on March 26, 2026.  This E.O. seeks “to promote economy and efficiency in Federal contracting by preventing racial discrimination.”  More specifically, the E.O. is focused on ending contractors’ “racially discriminatory DEI activities,” which the E.O. defines as: “disparate treatment based on race or ethnicity in the recruitment, employment (e.g., hiring, promotions), contracting (e.g., vendor agreements), program participation, or allocation or deployment of an entity’s resources.”

The President cannot, as a general matter, tell private companies what to do.  So instead, this E.O. conscripts the Federal procurement system as a mechanism to impose its policy goals – by requiring all Federal agencies to insert a new clause in all contracts and “contract-like instruments” requiring contractors and subcontractors at all tiers to agree:

(1) not to “engage in racially discriminatory DEI activities”;

(2) to allow the Government access to books and records to ascertain compliance with the clause;

(3) that the contract may be canceled, terminated, or suspended for noncompliance with the clause, and that the non-compliant contractor or subcontractor can be debarred;

(4) to report a subcontractor’s conduct that violates the clause;

(5) to inform the contracting agency if a subcontractor sues and the validity of the clause is at issue in the suit; and

(6) that the contractor recognizes that compliance with the clause is material to the Government’s payment decisions for purposes of the False Claims Act (FCA).

At first blush, this E.O. appears to have wide-ranging consequences.  For example, if implemented, contractors would need to re-examine and potentially revise their internal human resources policies and face potential contract termination, suspension, debarment, and civil and criminal liability under the FCA for engaging in “racially discriminatory DEI activities” – as defined by this Administration’s judgement, with only a vague definition to rely on for guidance.  Routine and seemingly innocuous activities could easily violate the clause.  For instance, would a contractor engage in “racially discriminatory DEI activities” by recruiting and interviewing candidates at a job fair aimed at a specific ethnic group?  What if the ethnic group-specific job fairs were the only means the contractor used to fill vacant positions?  What if the ethnic group-specific job fairs were only one of multiple avenues the contractor used to recruit new employees?

Despite this risk, contractors do not need to panic, at least not yet.  Contractors have time to carefully consider what the latest DEI E.O. will require and take steps to proactively come into compliance.

Key Takeaways:

The Clause Must Actually Be in Your Contract. This is a critical and often-overlooked point: an executive order does not, by itself, modify existing contracts or require anything from contractors.  Because the Administration doesn’t have the power over contractors that it has over Federal agencies, the E.O. requires a route to get to contractors to accomplish the Administration’s goals.  Since contracts define the relationship between the Government and contractors, contracts are how this E.O. can exert control over private sector entities’ internal policies and practices.  E.O. 14398 thus directs agencies to “include” the new clause in contracts and “contract-like instruments.”  That inclusion occurs only when:

  • A contracting officer incorporates the clause into a new solicitation or contract;
  • A contracting officer exercises an option on an existing contract and includes the clause at that time; or
  • The Government modifies an existing contract to add the clause (which requires the contractor’s agreement unless the contract contains a Changes clause authorizing unilateral modification).

Until the clause appears in your contract, the E.O.’s obligations do not apply to you as a matter of contract law.  The distinction between an E.O. directive to agencies and a binding contractual requirement on contractors is fundamental to Government contracts law.  As a general principle under the Christian Doctrine (G.L. Christian & Associates v. United States, 312 F.2d 418 (Ct. Cl. 1963)), certain Federal Acquisition Regulation (FAR) clauses may be read into contracts by operation of law—but this doctrine applies to clauses that express a “significant or deeply ingrained strand of public procurement policy.”  A brand-new, legally contested clause is unlikely to qualify.  Therefore, contractors should monitor their contracts to see if a new clause implementing this E.O. is added.

Litigation Will Delay and Shape Implementation. E.O. 14398 will be challenged in court, and its implementation will likely be put on hold as the challenges work their way through the judicial system.

The Administration’s earlier DEI-related executive orders—E.O. 14151 (Ending Radical and Wasteful Government DEI Programs and Preferencing, January 20, 2025) and E.O. 14173 (Ending Illegal Discrimination and Restoring Merit-Based Opportunity, January 21, 2025)—generated at least five major lawsuits, including NADOHE v. Trump (D. Md.), Chicago Women in Trades v. Trump (N.D. Ill.), and National Urban League v. Trump (D.D.C.).  Multiple district courts have thus far issued preliminary injunctions blocking the certification provision of E.O. 14173, which required contractors to certify they do not operate “illegal” DEI programs. Litigation continues on the DEI-related E.O.s, and the Government may prevail in certain instances; the Fourth Circuit Court of Appeals has already reversed the preliminary injunction in NADOHE v. Trump.  Nevertheless, contractors should understand that the E.O. as written may not be fully enforceable and will be the subject of litigation moving forward.

The legal theories put forward against E.O.s 14151 and 14173 are likely directly transferable to E.O. 14398:

  • First Amendment.  Courts have been sympathetic to the view that the vague prohibition on “illegal DEI” chilled protected speech and constituted viewpoint discrimination.  The definition of “racially discriminatory DEI activities” in E.O. 14398 is arguably more sweeping, as it is not confined to “illegal” activities and potentially reaches routine recruitment efforts such as attending job fairs aimed at particular communities.
  • Fifth Amendment (Vagueness).  Similar to previous executive orders, E.O. 14398 may be open to litigants arguing that phrases like “disparate treatment” in “allocation or deployment of an entity’s resources” provide no meaningful compliance guidance.
  • Procurement Act Authority.  E.O. 14398 relies on the Federal Property and Administrative Services Act of 1949 (the “Procurement Act”), which authorizes the President to issue policies to maintain “an economical and efficient system” for Federal procurement.  The Fifth Circuit’s decision in Louisiana v. Biden, 55 F.4th 1017 (5th Cir. 2022), which struck down the COVID-19 contractor vaccination E.O., established that this authority requires a “close nexus” to the statutory goals of economy and efficiency.  The Fifth Circuit warned against ratifying “an ‘enormous and transformative expansion in’ the President’s power under the Procurement Act.”  Louisiana v. Biden, at 1031, quoting   Util. Air Regul. Grp. v. E.P.A., 573 U.S. 302, 324 (2014).  Regulating contractors’ internal HR policies through the procurement system raises the same “major questions” concerns.
  • Separation of Powers.  By declaring compliance “material” for FCA purposes, the E.O. effectively attempts to expand the scope of Federal fraud liability—a function traditionally reserved to Congress and the courts.

Implementation Takes Time. Implementing a new mandatory contract clause for all Federal Government contracts does not happen overnight.  And it typically doesn’t happen within the ambitious timelines set out in E.O. 14398 either.  The E.O. directs agencies to ensure the new clause is included in contracts, subcontracts, and “contract-like instruments” (which the E.O. neither defines nor explains, but which are presumably other transaction agreements) within 30 days.  The E.O. also directs the Federal Acquisition Regulatory Council to amend the FAR to “provide for inclusion in Federal procurement, solicitations, and contracts subject to this order the clause described in section 3 of this order,” to remove FAR requirements that conflict with the new clause, and to issue deviation and interim guidance on the clause within 60 days of the E.O.’s issuance.

Put simply, agencies are required to add this new clause to all contracts within 30 days post-E.O., but guidance and FAR deviations to implement the new clause are not due for 60 days after the E.O.  Importantly, this abbreviated timeline from E.O. issuance to contract implementation does not appear to account for 41 U.S.C. § 1707, which provides that a procurement policy, regulation, procedure, or form cannot take effect until 60 days after publication in the Federal Register for public comment if it: (1) relates to expending appropriated funds; (2) has a significant impact beyond the agency’s internal operating procedures; or (3) has a significant cost or administrative impact on contractors.  An agency can waive the Federal Register publication and waiting period if urgent and compelling circumstances make it impractical to comply with these requirements.  But it is not clear how an agency could justifiably determine that “urgent and compelling circumstances” require waiving the public notice and comment requirements in this case.  E.O. 14398 was issued more than a year after the previous anti-DEI E.O.s and nothing in E.O. 14398 articulates an urgent need to bypass public notice and comment to implement the E.O.  Without publication in the Federal Register and a 60-day public notice and comment period, or waiver based on an “urgent and compelling circumstances” determination, this new clause will be subject to challenge if included in Government contracts.

False Claims Act Materiality. E.O. 14398 includes a provision requiring contractors to “recognize” that compliance with the new clause “is material to the Government’s payment decisions for purposes of the False Claims Act.”  This is certainly designed to pre-establish the materiality element of FCA liability, thereby lowering the barrier for the Government (or a qui tam relator) to bring fraud claims against contractors that allegedly engage in prohibited DEI activities.  The FCA is a key tool the Government uses to enforce its priorities and tamp down fraud in contracting (see Fluet’s previous FCA discussions here, here, and here), which can be an existential threat to most small or medium-sized contractors.

However, the Supreme Court’s unanimous decision in Universal Health Services, Inc. v. United States ex rel. Escobar, 579 U.S. 176 (2016), makes clear that materiality is a question of fact—not a question of contract drafting.  The Court in Escobar held that “[t]he materiality standard is demanding” (Id. at 194) and “looks to the effect on the likely or actual behavior of the recipient of the alleged misrepresentation.”  Id. at 193.

Under Escobar several principles limit the practical impact of E.O. 14398’s materiality declaration:

  • Labels are not dispositive.  The fact that a requirement is designated a “condition of payment”—or declared “material” to a payment decision—does not automatically make it so.  The Escobar Court emphasized that “not every violation of [a requirement expressly designated as a condition of payment] gives rise to liability.”  Escobar at 181.  What matters is whether the contractor knowingly violated a requirement “that the defendant knows is material to the Government’s payment decision.”  Id.
  • Government conduct matters.  If the Government “pays a particular claim in full despite its actual knowledge that certain requirements were violated, that is very strong evidence that those requirements are not material.”  Escobar at 195.  Given the ongoing confusion about what “racially discriminatory DEI activities” actually means in this context, as compared to the historic usage in employment discrimination law contexts, and the likelihood that many contractors will continue routine recruiting practices while the definition is litigated, Government payment behavior will be a key data point for materiality in any FCA case.
  • Minor or insubstantial noncompliance is not actionable.  The Escobar Court rejected the possibility that “minor or insubstantial” instances of noncompliance could support FCA liability.  Escobar at 194.  Many of the activities that arguably fall within E.O. 14398’s definition, such as targeted recruiting at community-specific events, are precisely the type of “minor or insubstantial” practices that Escobar shields from treble damages.

What to Watch For:

  • Litigation filings.  Watch for lawsuits challenging E.O. 14398.  The first rulings will signal whether courts treat this E.O. differently from E.O. 14151 and E.O. 14173.
  • FAR rulemaking.  Monitor the Federal Register for any proposed rule implementing the E.O. 14398 clause and any public announcements from departments and agencies.
  • Department of Justice enforcement signals.  The Civil Cyber-Fraud Initiative has demonstrated the Department’s willingness to use the FCA aggressively to ensure contract compliance.  Any Department of Justice guidance or enforcement actions related to E.O. 14398 will clarify the practical risk profile for contractors.
  • Circuit splits.  The Fourth Circuit’s February 2026 decision vacating the NADOHE injunction, contrasted with the Seventh Circuit’s pending review of the Chicago Women in Trades injunction, may create the circuit split that draws Supreme Court review for challenges to DEI-related executive orders.
  • Follow Fluet Insights.   Fluet attorneys will be tracking all of the above and will provide updates as this unfolds.

What Contractors Can Do Now:

While there is time before E.O. 14398 takes practical effect, prudent contractors should use this window to prepare—not to wait.  Working with experienced Government Contracts counsel, contractors should:

  1. Audit current human resources and recruiting practices.  Map your organization’s recruiting channels, hiring criteria, mentorship programs, employee resource groups, and vendor diversity programs against the E.O. 14398 definition of “racially discriminatory DEI activities.”  Identify any practices that involve “disparate treatment based on race or ethnicity” under a reasonable reading of the definition—and under an aggressive one.
  2. Distinguish between DEI and EEO.  Equal Employment Opportunity (EEO) compliance obligations exist independently of E.O. 14398.  Contractors must be careful not to dismantle lawful—and required—EEO programs in an overbroad response to the new E.O.
  3. Review subcontracting and vendor agreements.  E.O. 14398 requires that its contract clause flow down to all tiers of subcontractors and obligates prime contractors to report subcontractor violations.  Assess your supply chain for practices that could create exposure.
  4. Document Government knowledge.  Under the Escobar materiality framework, evidence that the Government was aware of a contractor’s practices and continued to approve payment is “very strong evidence” that those practices are not material.  Maintain records of communications with contracting officers and any Government acknowledgment of your diversity-related or human resources activities.

Avoiding panic in the face of rapidly changing contracting dynamics is essential to long term success.  Taking prudent steps to prepare without overreacting is key.  Staying informed will allow you to weather the changes and come out better positioned in the market. Fluet attorneys are well-equipped to guide Government Contractors through this process in a practical and dispassionate manner, having drafted E.O.s and helped implement them in the past.

Executive orders serve many purposes, including political messaging, shaping public opinion, and providing broad policy guidance to the Executive Branch. Only time will tell whether E.O. 14398 will have practical teeth for Government contractors at the contract level.  Bringing in experienced, effective legal counsel early in the process can help contractors avoid the prospect of costly compliance, or worse, ahead of need or failure to prepare for coming changes.